The consumer may be an economic drag for a few more years

Consumer confidence remains low. Home appreciation used to be a major source of borrowing through equity loans. When inflation matured it ultimately helped the debtors but today we have deflation first that first increases the percentage of debt putting consumers underwater.

When inflation starts again it will hurt debtors much more than they hurt today because before it raises home values it will first increase interest rates. Variable rates will double when inflation doubles. And it does not take much inflation to double interest rates from 2% to 4% or to quadruple them from 2% to 8%. The economy will need a different engine to recover for a while. In fact as the recovery increases many consumers will see relentless increases in the variable rate mortgage payments. If inflation jumps from 2% to 4% the variable rate debtor will see the relative value of his debt drop 4% due to the 4% inflation but he will still be under water and the variable rate payment paid on the mortgage will close to double. That is when the variable rate debtor will really feel the pain.

Market forces August 18

The media resumed its positive stance today. Yesterday most advisors were negative but today we once again have the Pollyanna spin headlines such as, “Home Depot's Second-Quarter Profit Falls Less Than Estimated; Sales Drop Home Depot Inc., the largest home- improvement retailer, reported second-quarter profit that fell less than analysts estimated.”

Jim Cramer said it was the duty of the media to use low estimates before the earnings announcement so the estimates are exceeded and then it is the duty of the corporations to give glowing projections for the rest of the year. Any company that always makes honest projections goes on Jim Cramer’s wall of shame. Every time Wall Street or Barron’s tells it like it is, the Jim Cramer MSNBC/Pravda spin doctors take the honest press to task. The spin now is not dangerous but Jim Cramer consistently gets people buying when the stock prices are about to collapse.

Home Depot had miserable results to report just as Lowes did before them. But HD gave an encouraging projection today for the rest of the year so Jim Cramer’s dishonesty paid off again as stock futures rose today.

The stock market is beginning to behave like the socialists declaration that Obama saved us from a great depression was a big farce intended to railroad through socialist legislation. The more people protest now against Obama and the more his presidency fails, the higher the stock market seems to go. So if socialized medicine fails we may not have the expected summer decline. And if cap-n-trade wealth redistribution fails next, this could be a very good year for investors.

Market Outlook

Last night Asian markets were mixed: Communist China up 1.4%, socialist Japan up 0.3%, oligarchy Hong Kong up 0.8%, Jakarta is down -2.1% and Taiwan is also down -2.1%.

Today most of the socialist European markets are up in a range of 0.5% to 0.8%

US futures are up 0.6% now at 7:30 EST before the market opening this morning.

Any panic spike down now is now a potential buying opportunity. We must be capturing profits on the rallies and then finding better buys on the declines. That is called cherry picking the best buys. We will continue cherry picking mostly into and now also out of the market rotating before or when the funds rotate through the sectors. We expect the decline will be a typical rotation with sharp drops in some individual stocks/sectors while other stocks/sectors bottom out or rise and then decline so the change in the market indices will be much smaller. The advances will be similar but opposite.

Investing time is now compressed and hence investing requires more trading skill. So far this year Jim Cramer is rotated his advice three times from defensive stocks to cyclical stocks. In other times he would have held tight for a year or more. We watch the sectors carefully because hedge funds seem to deflate one sector at a time and then let investors pump them back into overbought territory. They can do that best during the kind of rallies we see in this sideways market. Buy after they deflate a sector when there are bargains. The hedge funds move quickly in and out so after they move in it is usually too late.